Innovation & Patent Trolls

This research program is supported partly by the National Science Foundation Sci-SIP Award: Assessing the Impact of Non-Practicing Entities on U.S. Innovation ($385,502).

Patent Trolls: Evidence from Targeted Firms

We provide theoretical and empirical evidence on the evolution and impact of non-practicing entities (NPEs) in the intellectual property space. Heterogeneity in innovation, given a cost of commercialization, results in NPEs that choose to act as "patent trolls" that chase operating firms' innovations even if those innovations are not clearly infringing on the NPEs' patents. We support these predictions using a novel, large dataset of patents targeted by NPEs. We show that NPEs on average target firms that are flush with cash (or have just had large positive cash shocks). Furthermore, NPEs target firm profits arising from exogenous cash shocks unrelated to the allegedly infringing patents. We next show that NPEs target firms irrespective of the closeness of those firms' patents to the NPEs', and that NPEs typically target firms that are busy with other (non-IP related) lawsuits or are likely to settle. Lastly, we show that NPE litigation has a negative real impact on the future innovative activity of targeted firms.

Clearly defined property rights are essential for well-functioning markets. In the case of intellectual property (IP), however, property rights are complex to define, because unlike ownership of physical assets, the space of ideas is difficult to delineate. The United States and many other countries protect inventors’ IP through patents, property rights allowing ideas’ owners sole rights of commercialization—equivalently, the right to block commercialization of arguably similar inventions—for a period of time. In the United States, the legal system is the arbiter of patent infringement; hence, legal action (or the threat of legal action) is the main lever by which patent holders challenge alleged intellectual property infringers.

A new organizational form, the non-practicing entity (hereafter, NPE), has recently emerged as a major driver of IP litigation. NPEs amass patents not for the sake of producing commercial products, but in order to claim license fees and/or litigate infringement on their patent portfolios. The rise of NPEs has sparked a debate regarding NPEs’ value and impact on innovation: Proponents of NPEs argue that NPEs serve a key financial intermediary role, policing infringement by well-funded firms that could otherwise infringe upon small inventors’ IP at will. Opponents cast NPEs as organizations that simply raise the costs of innovation by exploiting the fact that an imperfect legal system will rule in their favor sufficiently often—even if no infringement has actually occurred—that the credible threat of the legal process can yield rents from producing, innovative firms. In part reflecting the debate on NPEs, there have been (as of today) a dozen bills introduced in Congress proposing to regulate the licensing and assertion of patents.